Disclosure and Transparency in Corporate Governance

Disclosure and transparency in corporate governance are the two foundations that companies build their ethical behavior and board involvement upon.

Transparent and disclose behavior provides a strong stakeholder engagement that promotes the public relations aspect, and at the same time lessens and monitors the board to undertake their own ways of “doing what they are supposed to do”.

In the following article, we will look at how transparency and disclosure are used in organizations regardless of industry and/or size, while also assessing their contribution to transparent governance.

What Are Disclosure and Transparency in Corporate Governance?

By “disclosure,” we mean the communication of data relevant to a company’s stakeholders. This information is often expressly requested or required by law.

“Transparency,” on the other hand, refers to a business’s ability to make these details easily accessible to everyone.

Both concepts are fundamental to supporting responsible and ethical corporate governance transparency.

Importance of Transparency in Corporate Governance

Transparency in corporate governance is essential for the smooth running of a company as it supports:

• Stakeholder trust: Effective communication allows a trust relationship between the company and its stakeholders.
• Ethical leadership and cultural integrity: In a transparent environment where communication is central, executives tend to adapt by behaving responsibly.
• Prevention of fraud and corruption: If data flows freely within the company, it is more difficult to hide misconduct and fraud.

Finally, a transparent environment and ethics in corporate governance​ promote alignment between the board of directors’ behavior and shareholders’ expectations.

Key Areas of Corporate Disclosure

Information must therefore be transparent before it is disclosed. But what details do companies typically share?

• Financial statements and earnings reports to inform stakeholders about the company’s economic and financial performance;
• Executive compensation to assess compensation policies’ fairness relative to company performance;
• Environmental, social, and governance (ESG) performance to understand the company’s attitude toward green and sustainable policies;
• The structure and independence of the board of directors to allow stakeholders to understand how their interests are represented.

In all of this, materiality is the key to understanding what information is relevant to communicating externally.

Standards and Regulations Governing Disclosure

There are various regulations regarding transparency and its relevance to stakeholder communications around the globe. The following is a partial list of regulatory requirements:

• SEC regulations in the US: For example, Regulation Fair Disclosure (Reg/FD) prohibits companies from disclosing relevant data to only one stakeholder because doing so gives priority to that party over other stakeholders.
• Sarbanes-Oxley Act of 2002 (SOX): It was created to enhance, or increase, financial reporting requirements for various organizations, such as increasing fraud penalties.
• IFRS and GAAP accounting standards: IFRS accounting standards have been accepted and approved in 140 countries around the world. Generally Accepted Accounting Principles (GAAP) are in place in the United States and are applicable in prescribing the conditions by which financial statements are prepared.
• EU Directive for non-financial disclosure: The EU has determined that the obligation to disclose non-financial information (e.g., environmental, ethical, social, etc.) will expand to thousands of companies.

This is part of the reason why many entities hire a professional corporate governance attorney to keep them compliance-ready with various regulations.

Role of the Board in Ensuring Transparency

The board of directors plays a central role in transparency and disclosure in corporate governance. In particular, it is responsible for verifying the accuracy, timeliness, and completeness of data. In addition, the board must supervise the effectiveness of internal control systems to prevent errors and omissions in business reports, support risk management, and facilitate dialogue between management and stakeholders. Finally, the board must monitor non-financial disclosures—such as those related to ESG practices.

In many cases, the internal control and audit committee (find out what is an audit committee) takes on an operational role in managing disclosure activities, acting as a guarantee of company data integrity and accuracy.

Tools That Improve Disclosure and Transparency

Through increased digital use, and extended processes, organizations are striving for transparent and efficient governance. Some of the more useful tools being used are:

• Integrated reporting platforms essentially place all financial and non-financial data in one document in one accessible place; 
• Board portals track securely documents, decisions, meeting notes, and communications;
• Stakeholder dashboards and investor relations home web sites regularly update data about business performance; 

These tools facilitate transparency through enhancing decision traceability.

Challenges to Achieving Full Transparency

Despite technological advances and growing awareness among stakeholders and companies, achieving total transparency in governance is a very complex process. Organizations face challenges such as data overload every day losing focus on what is truly relevant and what is not. 

Furthermore, delays or inconsistent data can significantly undermine investor confidence. Finally, it is not uncommon to see conflicts between what is right to disclose and what should be kept confidential, making it challenging to find the right balance.

To address this, organizations must adopt clear internal policies and continuously train their staff on responsibility and integrity. Finally, relying on external auditors allows companies to obtain objective assessments of their practices.

Benefits of Strong Disclosure Practices

However, transparent governance provides organizations with significant advantages.

• Greater access to capital: Thanks to efficient and transparent communication, firms are perceived more favorably by investors, attracting capital.
• Lower risk of regulatory sanctions: Compliance with international standards and codes significantly reduces sanctions risk.
• Stronger reputation: Transparency is a value and is recognized as such by customers and investors. This allows the company to improve its competitive positioning.
• Better internal alignment and performance monitoring: Clear communication channels allow staff to align themselves more easily with objectives, making internal coordination more efficient.

Examples of Transparency Failures and Best Practices

Recent history provides numerous examples of how transparency can jeopardize business survival. The case of Enron, where balance sheet manipulation and debt concealment led to the collapse of an energy giant, remains one of the most emblematic examples of failed governance. Similarly, the accounting fraud involving Wirecard highlighted the lack of adequate controls and clarity at the management level.

In contrast, some firms stand out for their commitment to transparency. Patagonia, for example, is recognized for its supply chain clarity and environmental impact. Unilever has earned a solid reputation for its ESG reporting clarity and systematic sustainability approach.

Embedding a Culture of Transparency

In conclusion, companies can use various strategies to implement transparency in a concrete and effective manner.

• Management commitment to openness and timely communication;
• Ethics and compliance training program to guarantee that all staff are kept up to date;
• Regular audits and third-party reviews to obtain objective opinions on financial and non-financial communication quality;
• Alignment of internal incentives with disclosure quality to encourage staff to behave proactively towards transparency.

FAQs

What is the difference between disclosure and transparency in corporate governance?

Disclosure is the communication of relevant information, while transparency is the ability of a company to make this data accessible.

Why is transparency important in governance?

To build trust with stakeholders, reduce the risk of sanctions, and promote ethical conduct.

Who is responsible for corporate disclosures?

Many figures: board members, executives, auditors, and compliance officers.

How do regulations affect corporate transparency?

The regulations establish the minimum standards and codes for reporting that must be followed.

Can too much disclosure be a problem?

Yes. You must adhere to the materiality of the information and strike a balance between relevant and confidential data.

References

Fung, B. (2014). The demand and need for transparency and disclosure in corporate governance. Universal Journal of Management, 2(2), 72–80. https://doi.org/10.13189/ujm.2014.020203Accademia+1HRPUB+1

Truong, L. D., Le, T. X., & Friday, H. S. (2022). The influence of information transparency and disclosure on the value of listed companies: Evidence from Vietnam. Journal of Risk and Financial Management, 15(8), 345. https://doi.org/10.3390/jrfm15080345MDPI

Schnackenberg, A. K., & Tomlinson, E. C. (2016). Organizational transparency: A new perspective on managing trust in organization-stakeholder relationships. Journal of Management, 42(7), 1784–1810. https://doi.org/10.1177/0149206314525202